Banks Avoiding TARP Funds Lending More

On Feb. 4, I wrote an article titled Top five US banks to invest in now, which listed the top five regional US banks based on the Bank Director Magazine. In that list, Glacier Bank (NASDAQ:GBCI) was the top bank. Glacier Bank rejected getting help from the Treasury’s Troubled Assets Relief Program (TARP). Instead, the bank went to private investors and did a successful common offering raising $98 million. Due to strong investor demand, the bank had increased the offering from 4 million to 5 million shares.

You may be wondering what this has to do with this article. Well let me explain. Many small banks have declined to participate in the TARP program simply because their balance sheets are strong and they did not want to adhere to the conditions that came with the capital offered by TARP. For example, Citibank (NYSE:C) and Fifth Third Bank (NASDAQ:FITB), who accepted the government's capital, have been forced to suspend dividends drastically and now they offer just a 1 cent dividend.

The recent edition of BusinessWeek has a piece titled Small Banks say ‘No Thanks’. Basically the author states that the TARP's overwhelming number of conditions do not attract many banks that are doing just fine. In fact, the author notes that the banks that are not accepting capital from the Feds have actually increased lending. This is very interesting since the fundamental reasoning behind the Fed's helping the banks was to ease the credit markets and have lending flow normally again. This has not happened, especially with the so-called 'SuperBanks'. Many of these institutions that took TARP capital have tightened lending and are sitting on enormous amounts of reserve funds.

The following are five banks that have not accepted federal aid and have increased lending in Q3 2008 vs. Q3 2007: